Citigroup and Morgan Stanley shares are best positioned to endure a 69% plunge in 2nd quarter bank earnings, Goldman Sachs says
- Bank earnings are set to tank 69% year-over-year for the second quarter, Goldman Sachs said in a Tuesday note.
- Morgan Stanley and Citigroup are Goldman analysts' top picks among the seven biggest US banks.
- Both firms enjoy a greater focus on capital markets, leading fee income to serve as a "partial offset to earnings headwinds," Goldman said.
- Citigroup also trades at a lower "burned down" tangible book ratio, suggesting the stock can rise even if the bank suffers some damage to its book value.
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Bank stocks are in for a drubbing this earnings season, but Goldman Sachs sees two firms' shares rising above the rest and one losing out.
Second-quarter earnings among the seven major US banks are set to nosedive 69% year-over-year as the companies divert profits to their loan-loss reserves, Goldman projected Tuesday. Near-zero interest rates will stifle net interest income and disproportionately harm companies with a greater focus on lending markets.
Morgan Stanley and Citigroup are favored to ride out the storm "given they have the least rate sensitivity" within the sector, Goldman analysts led by Richard Ramsden wrote in a Tuesday note. The two firms' greater focus on capital markets and fee income will provide "a partial offset to earnings headwinds" and the need to boost loan reserves, they added.
Citigroup shares are also set to benefit simply due to their valuation. The bank trades at 0.8x price-to-"burned-down"-tangible-book ratio, setting it apart as the cheapest of its peers. The segment trades with an average 1.3x ratio. Citigroup shares have room to appreciate even if the bank's second-quarter report reveals some damages to its tangible assets, the team wrote.
Wells Fargo is projected to be the only bank in the group of seven to report negative profitability for the quarter, Goldman said. US banks' loan provisions are projected leap 27% — or $32 billion — from the already elevated first quarter, particularly harming credit-focused firms.
Looking into the second half of the year, the analysts expect loan-loss provisions to fall 60% through 2020 as reopenings soothe credit stresses. Any bank commentary on dividend health and Federal Reserve stress test resubmissions will also offer a look at future performance. Talk of pre-provision net revenue trends can further detail how liquidity operations, larger balance sheets, and lower rates are changing banks' income streams, Goldman said.
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